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Providing coverage of Alaska and northern Canada's oil and gas industry
July 2006

Vol. 11, No. 29 Week of July 16, 2006

Explorers lose Mackenzie test case; Petro-Canada hikes Arctic offer — again

Faced with increasingly bleak natural gas exploration prospects, Canada’s Mackenzie Delta and Beaufort Sea has seen its troubles compounded by a National Energy Board ruling that could give independent E&Ps second thoughts about embarking on new wells.

Canada’s energy regulator sided with Imperial Oil in its disagreement with six explorers who wanted the proposed gas gathering pipelines and main line down the Mackenzie Valley declared a “single pipeline” falling under NEB jurisdiction.

Instead the board upheld the status quo, which puts the gathering network and a processing plant at Inuvik, Northwest Territories, under the Canada Oil and Gas Operations Act and the Mackenzie Valley line under its own control.

Anadarko, BP, Chevron Canada, Devon Energy, EnCana and Nytis Exploration, all members of the Mackenzie Explorers Group, wanted the gathering operations to be overseen by the NEB, arguing that was necessary to achieve just and reasonable tolls, non-discriminatory service and fair access to transmission systems.

Imperial, lead partner in the Mackenzie Gas Project, with Shell Canada, ConocoPhillips Canada and ExxonMobil Canada as its partners, flatly rejected that idea, insisting that the gathering lines in the Mackenzie Delta and a natural-gas-liquids line from Inuvik to Norman Wells should be subject to the COGO Act.

The NEB endorsed that argument, ruling that COGO is designed to regulate oil and gas exploration and development in the Northwest Territories in a safety and environmentally friendly way, whereas the NEB’s role is to protect the public interest where oil and gas are transported across jurisdictional boundaries by regulating traffic, tolls and tariffs.

Explorers group disappointed

Devon Canada Vice President Michel Scott told Petroleum News that the explorers group was “disappointed ... no doubt” because it viewed the Mackenzie project as a “basin-opening” pipeline that should be exploration friendly by ensuring there was some form of economic recourse to a higher tribunal for explorers who were unhappy with the terms being offered.

He said the choices now are for explorers to “accept the deal that is put in front of them or build their own facilities.”

“We’d like to see the whole set of facilities be as exploration friendly as possible,” Scott said.

The NEB decision has created “uncertainty and will have an impact on the pace of exploration,” he said, suggesting third-party companies face an added challenge to fund their programs.

An Imperial spokesman told reporters that his company was pleased to now have clarity on how to proceed with the Mackenzie project.

Winter outlook already shaky

The outlook for the 2006-07 winter was already shaky. Devon has put drilling on hold while it evaluates results from a C$60 million well in the Beaufort Sea.

On top of that it has relinquished more than 400,000 acres of rights and has said it would be open to taking on a partner.

A partnership of Chevron and BP has indicated its waning optimism by inviting expressions of interest on an areawide farm-in opportunity for about 1 million acres of exploration acreage near the Mackenzie pipeline corridor, where 3-D seismic has identified prospects over about 308 square miles.

Anadarko will provide a reading on the level of enthusiasm when it seeks buyers for its Arctic holdings as it unloads all of its Canadian assets.

They include a 25 percent stake in the Umiak N-16 discovery well and N-5 delineation well on Richard’s Island and 140,000 acres of Delta leases that it acquired in partnership with EnCana and ConocoPhillips earlier this year for C$40.3 million.

Appeal under consideration

Scott said lawyers for the explorers group are still considering the decision to decide if an appeal is possible.

However, he conceded that the group’s priority is still to get the main line built without which there is “no hope of getting any gas out of the region.”

The NEB left one shred of hope for the explorers by saying it “remains concerned” about appropriate tolls and access to the gathering pipelines and “the methods for resolving disputes on these matters.”

It has indicated that proposed mechanisms to satisfy those issues will be discussed during the current round of NEB hearings on the project and could be part of the board’s final ruling in 2007.

For now, the proposed gathering system is intended to have initial capacity of 1.075 billion cubic feet per day when it comes on stream in 2011. Of that total 830 million cubic feet will come from the anchor fields at Taglu, Niglintgak and Parsons Lake, leaving 245 million cubic feet available for third-party shippers holding discoveries north of Inuvik.

But the explorers group has estimated that initial gas volumes take up almost all of the planned gathering pipelines, leaving little scope for any new discoveries in the Mackenzie Delta and Beaufort, suggesting that another pipeline might have to be built to connect with the main line.

—Gary Park





New round in Canada Southern bidding

For a company holding assets that remain unproven and are at least a decade and likely longer away from development, Canada Southern Petroleum has caused one of the liveliest takeover contests in Canadian oil patch history.

Petro-Canada put its third offer on the table July 11, dangling an all-cash bid of US$13 per share, having started out at $9.75 and climbed to $11, only to be topped again on July 12 by Canadian Oil Sands Trust, which raised its friendly bid to $13.10.

Petro-Canada’s offer expires July 27 while the trust bid is open until Aug. 1.

Once more, the board of Canada Southern has unanimously recommended that shareholders go with the trust, while the company’s shares have almost tripled in value since Petro-Canada initiated a hostile bid of $7.50 on May 11 that it hiked to $11 on June 29. The trust entered the picture on June 19 at $9.75.

Canada Southern estimates it has 927 billion cubic feet of gas reserves in Canada’s Arctic Islands, but it is prevented by Canadian and U.S. regulators from claiming those reserves because there is no way to bring the gas to market.

Trust Chief Executive Officer Marcel Coutu said the trust’s interest is unchanged.

The Arctic gas resources provides a “hedging strategy with unparalleled duration” to cover the trust’s gas needs to fuel its one-third stake in the Syncrude Canada oil sands consortium, he said.

Kathy Sendall, Petro-Canada’s vice president for North American natural gas, said her company believes “these Arctic assets will play an important role in the future development of northern Canadian natural gas.”

Exactly what role Petro-Canada isn’t saying because it has no current development plan. Sendall emphasized that before gas in the remote Arctic Islands can be exploited, the holdings must be consolidated.

“Acquiring this piece and removing the burden of (Canada Southern’s) carried interest is an important step in that consolidation,” she said.

“As we’ve said before, as the controlling interest holder and as an established operator it just makes sense that Petro-Canada would be in the best position to consolidate and develop these future resources,” Sendall said.

Although Petro-Canada won’t comment, observers hold the theory that Canada Southern’s gas could serve as a back up for the joint Petro-Canada-TransCanada liquefied natural gas terminal at Gros Cacouna, Quebec.

Petro-Canada’s primary hope is that it will form a partnership with Russia’s Gazprom to provide LNG for the facility.

—Gary Park


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